Insights

Solar, Anyone?

Winter solstice is upon us and sunlight is scarce in Vermont. Even so, the recent Paris climate change accord and the even more recent extension of US renewable energy tax credits have us thinking about solar, for both rooftops and stock portfolios.

On My Rooftop?Many Americans already take climate change seriously, recognizing that lowering their energy usage does more than save money. Nowhere is such behavior more visible than on rooftops and in fields across the country where solar panels seem to be appearing daily. We are certainly not solar experts, but recent analysis performed on behalf of a client who was considering a residential roof-top system (in Vermont!) was enlightening and we think it’s something worth sharing.

Most presentations rely on breakeven and other analyses to demonstrate the financial benefit of going solar. What we saw confirms the adage that with any projection, including our retirement planning, the output is only as good as the input.

We know many people exploring home solar systems are more interested in the environmental benefit than the return on investment. Whatever the motivation, reviewing the assumptions underlying the financial projections is essential to making a sound decision. Are electricity prices projected to continue increasing at or above historical averages of about 2% to 4%? In many states, electricity fed back into the grid from the rooftop is priced at or even above retail. Such subsidies are subject to annual legislative review and are not likely to continue unchanged for 30 years. Do “breakeven” calculations include an opportunity cost – what you might earn elsewhere on the funds invested in solar?

Despite our cautious view of some of the sales tactics we’ve heard and seen, the bottom line is that current federal and (in many cases) state financial subsidies can make solar a compelling proposition. Our analysis revealed a breakeven for the aforementioned client of 15-20 years versus the ten years estimated by the solar salesman, but either way, it was still well worth her consideration. Of course, we encourage interested parties to shop around, read and ask lots of questions.

In My Portfolio?With solar and other clean energy providers positioned for continuing growth, why not invest? One has choices: equipment manufacturers, facilitators, project owners, or businesses that integrate all three. We’ve learned over the years that it is important to be selective in choosing how to invest in new technologies. Innovations such as fiber optic cable, internet service providers, 3-D printing and even earlier versions of solar have changed how we live, but investments in the related businesses more often than not have led to disappointment. It’s easy to predict that solar adoption will increase as panel prices fall. It is much harder to predict whether the manufacturers of those panels will still be turning a profit at those lower prices. What’s good for consumers and great for the environment is no sure bet for the investor.

Investors must also consider how evolution in the energy chain will impact other industries. For instance, solar-equipped households will be even more inclined to purchase electric cars because of lower charging costs. Electric utilities face continuing upheaval as their customers increasingly “grow their own,” yet still expect back-up power on demand.

We are continually on the lookout for opportunities that appeal to both to our view of where the world is heading and our desire to invest with prudence. While some areas of the energy landscape will remain in the highly speculative category for the foreseeable future, others are developing predictable cash flows that can be evaluated for suitability with increasing confidence.

Beyond ParisThe Paris climate accord was a political milestone because it displayed a near universal commitment to reducing carbon emissions. Notable was the previously absent leadership of China and the US. The engagement of the globe’s largest economies encourages greater participation by all parties. Even Congress appears to be feeling the love: just a few days after the diplomats left Paris, Congress agreed to extend existing tax credits for investing in solar and wind power installations.

Regulations and incentives will continue to raise the price of “dirty” energy relative to “clean.” While the rules will vary by locale and over time, we think adoption and investment will both benefit from more clarity regarding goals. But it would be a mistake to view government regulation as the only, or even primary, driver of change. Increasing use of “green” practices and products will drive associated costs down to a level where governmental intervention is no longer necessary. Better than current forms of incentives and regulation would be a carbon tax, ameliorated by progressive changes to tax policy elsewhere. This is too much to ask of politicians today, but may still be where we end up years from now.